By Brad Donnell
The changing demographic landscape seems to be a hot topic these days. It is usually referred to from the perspective of changing ethnicities and income levels. There is another dynamic at play as well that will influence the commercial real estate markets for years to come. A quick perusal of the internet yielded this telling commentary:
“As a Gen Y-er I don’t even think of home ownership as part of the American dream. At 25, for me and several of my peers’, the “American Dream” is freedom of mobility, the excitement of an urban area, and building large and dynamic social networks. The ball and chain of home ownership poses a threat to all of those goals. I have moved each year since 2004. Often within the same city, we love change.
The world is much more global now, we want to travel, diversify investments, and meet new people. We are a non-committal group, used to having “our way.” Settling down with the white picket fence, like getting the gold watch after thirty years at the same corporation are aspirations that are forever in the past.” – Caroline
I have spared you most of her “non-committal” to correct grammar in the above paragraph which also seems to be a trait of the Gen Y crowd. My wife works with a gaggle of this lot and can attest to this same sort of gypsy-esque blather she hears from them. None of them like or identify with the home ownership part of the American Dream, marriage or grammar. Maybe it is the advent of smartphones and shorthand texting they grew up with that has spurred this sentiment. I think there is something to be said for growing up with a phone at home that is actually wired to a plug that makes one feel anchored and gives a sense of permanence.
Many of the baby boomer crowd grew up with hard wired, rotary phones with two parents in the house. If you needed to call someone, you went home to do it, not on the tollway doing 70 mph. Their children, like me, understand the comfort of a traditional home and aspired in life to re-create that for their own children and enjoy that sense of being anchored. As divorce became socially more acceptable and technology advanced to smartphones, the Gen Y crowd grew up without this sort of esoteric bond with home ownership. The single-family mortgage disaster only helped to reaffirm their disdain for owning a home, while the job market disaster reinforced their antipathy toward long-term employment. It is no wonder the Occupy crowd has such a following of self-centered Pikeys crying about big this and big that, moaning about the mean old establishment and how horrible it is for anyone to make a profit. Although I can empathize with them being dismayed about their future, there is something to be said for seeking refuge from the chaos in the world in your own home, the one place that you know is not changing.
This generation of noncommittal vagabonds is a renter by choice for life, which is a critical consideration for investors in commercial real estate. Like frogs hopping from one lily pad to the next, they change jobs, move to other cities and bounce through short-term careers with regularity. The mobility of communication pervades their lives and dissuades them from seeking or needing a permanent home from which to communicate.
In the past, single-family housing concentrations would clearly dictate what the income levels were for a specific part of town. It was relatively easy to look at the median home price and be able to back into what kind of disposable income would be available to buy televisions, lawn mowers and hamburgers. Retailers could commit to the stability of a neighborhood knowing the population and income of the surrounding housing stock was not going to change dramatically during the term of their lease. That disposable income was likely to remain stable, which would give them the certainty they needed to make a long-term commitment and investment.
In the new and fickle renting environment however, this long-term certainty does not exist. Retailers have a much harder time committing to an area if the renters with the disposable income they are seeking decide to move to the next hotter part of town. The highly transient nature of the relatively liquid Gen Y and Millennial crowd can empty out of an area virtually overnight like a swarm of locusts moving to a neighboring corn field. If you mix in the increasing desire to stay single, you really have the makings of an ambulatory society.
Currently, just 51 percent of all adults who are 18 and older are married, placing them on the brink of becoming a minority, according to a Pew Research Center analysis of census statistics. That represents a steep drop from 57 percent who were married in 2000. In 1960, for example, when most baby boomers were children, 72 percent of all adults were married. The median age for brides was barely 20, and the grooms were just a couple of years older.
“In the 1950s, if you weren’t married, people thought you were mentally ill,” said Andrew J. Cherlin, a Johns Hopkins University sociologist who studies families. Marriage was once mandatory. Now it’s culturally optional and it is seen as an obsolete social environment.
For the multifamily developer, this is a mixed bag. Demand for rental units is only going to increase as people shun marriage and homeownership. The downside though, is your tenants may pull up their tents in 6 months and move to LA to enter their eighth career once they get the text about “ima buss 2git beers 4 u2 cuz LA is sw33t & da chicks B way2 h0t!”.
Clearly, multifamily will remain the most favored asset class for years to come as the 20 – 30 year olds are likely to shun home ownership for quite some time, if not forever. Despite a much larger turnover of tenants, occupancies should stay high even once home lending settles back down to a more normalized process. The goal of ownership is simply gone for most of this crowd, even if mortgage companies go back to the practice of financing anyone with a warm body.
The location of multifamily projects does need to take into serious consideration the mindset of these tenants. Gen Yers are simply not going to hang in the suburbs with those dreaded home owners lest they get the same disease and wind up just like them. If you go back and read Caroline’s quote, it specifically references the desire to be in an “urban” area (i.e. far away both mentally and physically from those nasty white picket fences and all they represent).
Retail and office developers have a much harder time trying to chase these address-adverse folks. A person with a transient mentality is not going to want to go to an office, but rather work from home. That same person is also not going to want to go to a store to buy something they could instead order off the Internet. Only by virtue of the immediate need for self-satisfaction will brick-and-mortar retail stores continue to exist. The Gen Yers will forever be torn trying to weigh which immediate gratification means the most to them, the immediate ordering or the immediate getting. At least they do not like to cook, so pizza delivery joints that allow ordering over the Internet or through a smartphone app should enjoy a bang-up business. Maybe S&P or Fitch can start to rate these pizza joints, as they are likely to become the cornerstone of retail centers in the future much like grocers have been. Dude, U gots a strip wif bangin pie! Dat cap rate mus be B-Lo 7 pur¢ 4sho!
The fundamental dynamics of income stability and socialization are changing substantially for commercial real estate, but in different ways for different property types. Some will be the beneficiaries of this shift but others may find the same obsolescence marriage seems to have. The non-online socialization and sense of home that suburbs afford are no longer attractive for many of the Gen Y/Millennial crowd whose only exposure to that way of life are the re-runs of Happy Days or The Brady Bunch they happen to stumble into on YouTube while searching for Halloween costume ideas they can order from Amazon.com. The shrewd real estate investor should take into consideration not only the obvious demographic changes in the market, but the more subtle sociologic and generational changes as well.